Shares of major cruise line stocks Carnival Corporation (NYSE:CCL)(NYSE:CUK), Royal Caribbean (NYSE:RCL), and Norwegian Cruise Line Holdings (NASDAQ:NCLH) all took a bath yesterday — the bad kind. After industry leader Carnival announced it had suffered a $2.9 billion net loss for its most recent quarter, its stock quickly sank 10%, and pulled the others under in its wake.
That was yesterday, though. This is today. And today, Carnival and Royal Caribbean stocks are both bouncing back, up 2.7% in 3:25 p.m. EDT trading, while Norwegian Cruise is doing even a little bit better than that — up 2.9%.
Three cruise line stocks — which one do you like best? Image source: Getty Images.
Why are cruise stocks bouncing back? There’s no obvious news to explain the rebound — no analyst upgrades or price target hikes for example, nor any positive news out of the cruise stocks themselves. Still, here’s a theory:
One of the reasons Carnival shares got torpedoed yesterday was because it announced plans to dispose of a total of 18 ships from its fleet — five more than previously promised. On one hand, this illustrates the scale of the crisis cruise lines face: There’s way more supply (cruise ships) than they expect to have demand to fulfill (cruise passengers), even after the CDC lifts its no-sail order and permits cruising to resume from U.S. ports.
To help bring supply into balance with demand, therefore (and also cut its cost of doing business), Carnival is slimming down its fleet much faster than anticipated.
But here’s the thing: While Carnival’s supersized cost-cutting makes the dangers clear, it also helps to clear out one of the obstacles to this industry recovering: overcapacity.
Because Carnival is cutting the size of its fleet so much, capacity in this industry will also be cut. This will help to eliminate oversupply, and minimize the risk of a price war breaking out as cruise lines battle for their fair share of vacationers’ discretionary dollars once cruising opens up again. In so doing, Carnival has essentially “taken one for the team,” and pulled forward the day when cruising will once again become a profitable industry.
That’s actually good news for Carnival — and for Royal Caribbean and Norwegian Cruise as well. If you ask me, it’s the reason these stocks are going back up today.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Carnival. The Motley Fool has a disclosure policy.